from the Daviess Circuit Court The Honorable Gregory A.
Smith, Judge Trial Court Cause Nos. 14C01-1608-PL-380
ATTORNEYS FOR APPELLANT Paul D. Vink J. Christopher Janak
Bose McKinney & Evans LLP Indianapolis, Indiana
ATTORNEYS FOR APPELLEE Peter J. Rusthoven Nicholas K. Kile
Hillary J. Close Barnes & Thornburg LLP Indianapolis,
In 1992, Appellant-Defendant/Respondent the City of
Washington, Indiana, entered into a contract ("the
Contract") to sell water to
Appellee-Plaintiff/Petitioner the Daviess County Rural Water
System, Inc. ("DCRW"). The Contract provides that
"[a] ny increase or decrease in rates shall be based on
a demonstrable increase or decrease in the costs of
performance hereunder[.] " In 2016, the City passed an
ordinance which raised DCRW's rates 57%.
DCRW challenged the rate increase in two lawsuits-one a
statutory challenge to rate increases and the other a
declaratory judgment action-both lawsuits being based on the
contention that the City breached the Contract by raising
DCRW's rate without a demonstrable increase in the costs
of performance. Following a bench trial, the trial court
entered judgment in favor of DCRW and invalidated the entire
Ordinance on the basis that its provisions were not
severable. The City appeals, contending that the trial court
erred in (1) concluding that the City breached the Contract,
(2) invalidating the entire Ordinance, and (3) denying its
motion to dismiss DCRW's declaratory judgment action.
Because we disagree with the City's first and third
contentions but agree with the second, we affirm in part and
reverse in part.
and Procedural History
DCRW is a nonprofit water utility that purchases water from
the City for resale to business and residential customers in
rural Daviess County. DCRW has approximately 2800 customers
and operates 300 miles of lines, three water towers, and
three standpipes. On May 11, 1992, the parities executed the
Contract, which obligates the City to sell DCRW up to thirty
million gallons of water a month. The Contract, inter
alia, set the initial rate schedule for water purchases
and provided for authorized annual rate adjustments, subject
to the following provision in Section C.5.: "Any
increase or decrease in rates shall be based on a
demonstrable increase or decrease in the costs of performance
hereunder, but such costs shall not include increased
capitalization of the seller's system."
Appellant's App. Vol. II p. 40.
Before 2016, the City increased DCRW's rates pursuant to
the Contract as part of across-the-board, pro rata rate
increases on its customers, at least one of which increases
was approved by the Indiana Utility Regulatory Commission and
none of which were based on a cost-of-service study. The most
recent rate increases prior to 2016 occurred in 2010 and
2012, and the latter increase was based on a report by H.J.
Umbaugh & Associates ("Umbaugh") which did not
include a cost-of-service study. The 2012 increase was
computed based on the City's capital extension and
replacement budget. The 2010 and 2012 increases raised rates
approximately 42% between them. In 2014, Umbaugh prepared a
draft cost-of-service study, which, as in 2012, computed rate
increases based on the City's capital improvements
In July of 2016, Umbaugh completed a cost-of-service study
("the COS Study") and recommended an increase in
DCRW's rates, which were $1.43 per 100 cubic feet at the
time. Unlike the 2012 and 2014 reports, which used a
"detailed extension and replacement" or
"capital improvement program" accounting method,
the COS Study based its proposed rate increase on using the
City's "depreciation expense" to compute the
City's revenue requirements and cost of providing service
to DCRW. Appellant's App. Vol. II p. 15. The switch to
using the depreciation method resulted in an annual increase
in the City's revenue requirement of more than $400,
On August 8, 2016, the City Common Council passed, and the
City's mayor approved, Ordinance 12-2016 ("the
Ordinance"), which increased the wholesale rate for
sale-for-resale customers to $2.25 per 100 cubic feet, which
had the effect of increasing DCRW's rates approximately
57%. The Ordinance also increased the rates of individual
customers who lived outside the City by 14.8%. The increase
implemented by the Ordinance would increase the cost of water
purchased by the DCRW by approximately $325, 000.00 annually.
On August 12, 2016, pursuant to Indiana Code section
8-1.5-3-8.2,  DCRW filed a petition in Daviess Superior
Court challenging the Ordinance as it applied to them,
alleging that it violated Section C.5. of the Contract. Also
on August 12, 2016, DCRW filed a declaratory judgment action
in Daviess Circuit Court, seeking to have the Ordinance
declared void as applied to DCRW. On August 22, DCRW moved in
Daviess Circuit Court to consolidate the two cases, which
motion the trial court granted on August 26, 2016.
On October 26, 2016, the trial court conducted a one-day
bench trial Accountant Steven Brock testified that he had
prepared an "Exception Report" to the COS Study for
DCRW and that, in his opinion, the COS Study did not propose
rate increases for DCRW that were based on a demonstrable
increase in the cost of performance. Brock testified that,
using the same methodology as was used in 2012, the
City's net revenue requirements increased approximately
$263, 339 from when rates were set in 2012 to 2016, or
approximately 5.43%. Kerry Heid also opined that the COS
Study did not support a 57% water rate increase for DCRW.
On January 24, 2017, the trial court entered its judgment,
concluding, inter alia, that the City was bound by
the Contract; the Ordinance's rate increase as to DCRW
breached the Contract; and the provisions of the Contract
regarding the DCRW rate increase could not be severed from
the provisions raising the rates on non-City-residents,
thereby invalidating the entire Ordinance. The trial
court's order provides, in part, as follows:
23. At the hearing in this cause both [City] Mayor Wellman
and Washington witness David Dahl testified that all prior
increases had been across-the-board (pro-rata as to all
consumers) and improvements made to Washington's system
since 1992 had been recovered through those rate increases.
47. At the hearing in this cause, DCRW Witness Mr. Kerry Heid
raised several serious concerns about the 2016 Umbaugh study
and Mr. Dean Rogers, on behalf of the City of Washington,
responded to these criticisms.
48. Accordingly, the Court finds that the question of how
much it currently costs Washington to serve DCRW is in
51. The July, 2016 Umbaugh report calculates the City of
Washington's revenue requirement utilizing depreciation
52. The evidence revealed that the 2012 and 2014 reports
utilized a detailed extension and replacement budget instead
of the depreciation expense figure.
53. Depreciation changed very little among 2012, 2014 and
2016. (See Pl.'s Ex. 59; see also Pl.'s Exhs.3, 14,
17 and 18.)
54. However, by switching from the budgeted improvements
method to depreciation resulted in an increase to
Washington's revenue requirement by more than $400, 000
per year. (See Pl.'s Ex. 59).
55. The Court finds that this is not an actual increase in
costs, but an increased assignment of capital costs that the
City of Washington was already incurring and had already
shared proportionately with all consumers (including DCRW)
through the last rate increase in 2012.
56. The Court makes this finding concerning the change in
methodology based on some of the following facts and
evidence. On cross-examination the City of Washington
witness, Mr. Dean Rogers, confirmed that: (1)
Washington's revenue requirements have only increased by
about 15.7% since 2012 according to Umbaugh's
calculation; (2) when total costs being incurred by
Washington in 2012 (as reflected in the 2012 Umbaugh report)
were adjusted to measure them the same way as in the July,
2016 Umbaugh report (i.e., using depreciation expense in the
revenue requirement calculation as opposed to an extension
and replacements budget), costs have only increased by
approximately 5.89%; and (3) Mr. Rogers did not know the
difference between what he contends is the current cost to
serve DCRW and what that cost was in 2012 when DCRW incurred
its last rate increase. (See Pl.'s Ex. 59.)
57. Additionally, Mr. Seever, who was a Witness for the City
of Washington, testified that he would not expect DCRW'S
relative share of the costs to have changed since 2012. (See
Pl.'s Ex. 55, p. 31, lines 8-12.)
58. The 2016 Umbaugh report shows (at page 15) the derivation
of the revenue requirement Washington allocated to DCRW,
which directs the portion of debt service and depreciation
based on the allocation of capital plant derived on page 10.
It also shows the operating expenses and taxes apportioned on
the basis of allocated capital plant at pages 12 and 13.
P1.'s Ex. 3, pp. 10, 12, 13 & 15.
59. The Court finds that the City of Washington has not
demonstrated that its proposed rate increase to DCRW is based
upon a "demonstrable increase in costs" as required
in the contract since the contract was last modified by
changing rates in 2012.
67. All rates in a rate ordinance are interrelated such that
if the Court were to find one rate is unlawful, it would
impact other rates in the ordinance.
68. The rate ordinance at issue herein (Ordinance No.
12-2016) does not contain a ...